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Terms of Settlement

FOS seeks to resolve disputes in a cooperative, efficient, timely and fair manner. An important part in achieving this goal is to ensure that agreed resolutions between Applicants and financial services providers (FSP) bring finality to disputes.

FOS has released Operational Guidelines in relation to the Terms of Reference.  The guideline to paragraph 8.8 of the Terms of Reference provides as follows:

 

Standard form releases

FOS has produced standard form releases that an Applicant may use to provide an FSP with a release from liability. There are different standard form releases to be used in the following cases:

  • where an Applicant accepts a Recommendation or Determination; and

  • where a Dispute is resolved by mutual agreement.

 

The standard form release used in a Dispute where an Applicant accepts a Recommendation or Determination meets the requirements for releases set by paragraph 8.8. It is:

  • a binding release of the FSP from liability in respect of the matters resolved by the Recommendation or Determination;

  • for the full value of the claim that is the subject of the Dispute; and

  • effective from the date on which the FSP fulfils all of its obligations under the Recommendation or Determination.

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Releases that are not in a standard form

If an FSP requests an Applicant to provide a release that is not in a standard form, the FSP will have to prepare the release and bear all costs associated with preparing it. FOS will advise the Applicant in this situation to obtain legal advice on the release. FOS may also, under paragraph 9.4, require the FSP to pay costs incurred by the Applicant in obtaining this advice.

FOS will not provide legal advice to any party on the effect of a release prepared by an FSP. FOS will conduct a limited review of such a release, however. If FOS considers the release unacceptable, it will raise its concerns with the FSP and ask it to redraft the release. FOS may consider a release unacceptable because, for example:

  • the release does not accord with the Recommendation, Determination or resolution agreement made in respect of the Dispute;
  • the requirements for releases set in paragraph 8.8 (which are listed above) are not met;
  • the scope of the release is unreasonably wide; or
  • the release purports to bind the Applicant before the FSP has complied with its obligations.

 

The purpose of this article is to provide further guidance to Applicants and FSPs about what items are appropriate to include in terms of settlement documents when the settlement modifies the Applicant’s obligations in respect of a disputed debt, and the FOS standard form release document is not used and the FSP requires a different terms of settlement document.

Agreement to settle disputes can be oral or in writing. An oral agreement can be binding as a settlement. However, where any agreement is not reduced to writing there is a risk of a dispute occurring as to the terms agreed and whether or not agreement was actually reached.

For this reason FSPs often require an Applicant to enter into formal terms of settlement to document an agreed resolution. On occasions, an agreed resolution between an Applicant and an FSP can be jeopardised due to disputes that arise as to the content of those written terms of settlement.

Some general principles

In order to prevent disputes over the form of such settlement documentation ‘derailing’ an agreed resolution, it is our view that terms of settlement that resolve FOS disputes should comply with the following principles:

 

  1. The terms of settlement should bring finality to the dispute.
  2. The terms of settlement should reflect the agreement between the parties and not introduce new terms.
  3. Every endeavour should be made to draft the terms of settlement in plain English.
  4. The terms of settlement should expressly deal with the consequences of non-compliance with the settlement.  However it should not allow the FSP to seek to recover a sum greater than the compromised / settlement sum plus recovery costs except where:

(a) the debt has not been disputed, or

(b) the Applicant is free to raise its defences to the initial claim.

  1. The terms of settlement should, as a general rule, provide that the Applicant is given seven days notice of any default within which to remedy that default, prior to any action to enforce the terms of settlement.
  2. The terms of settlement should not bar an Applicant from contesting whether they or the FSP complied with the terms of settlement.
  3. The terms of settlement may provide for discontinued legal proceedings to be restored or reinstated upon default.  Where this occurs, the proceedings may need to be amended to reflect that there has been a settlement agreement which has not been complied with.
  4. The terms of settlement should not require the Applicant to consent to judgment.

Consequences of default

FOS expects that when parties resolve a dispute that the agreed resolution should bring finality to the dispute. The documenting of that settlement by way of terms of settlement is not an opportunity to revise the agreed resolution. An issue that regularly derails a settlement is that the consequence of non-compliance with the settlement agreement is not agreed upon at the time the dispute is resolved. It is important that the parties consider this issue at that time.

The general principle applicable to the settlement of a dispute is that the settlement agreement constitutes a new contract that effectively replaces the party’s rights under the previous arrangements subject to the dispute. The usual remedy for breach of the settlement agreement is to sue for breach of that agreement. 
 

Where the Applicant disputes the debt

Regularly settlement of FOS disputes will involve an Applicant who disputes liability and then compromises their dispute in consideration of paying a reduced amount to the FSP than would otherwise be payable under the contract subject to dispute. Where this occurs, and the Applicant fails to make the required payments, the usual legal remedy is that the FSP can recover the compromised settlement sum plus recovery costs. In such cases, where there is a disputed debt, recovery of a sum greater than the compromised sum plus costs (e.g. the amount originally payable under the contract) can contravene the doctrine of penalties.

This is because that greater sum was never an accepted debt and the Applicant compromised their rights in opposition to that sum being payable.
 

Where the Applicant does not dispute the debt

The above analysis should be contrasted to cases where the Applicant does not dispute the debt but seeks what is sometimes referred to as an ‘indulgence’ by way of a revised payment plan.

In such cases the Applicant accepts the amount claimed by the FSP is owing as the debt and no defences have been compromised in consideration of a payment of a lesser sum. In that situation the settlement agreement can allow for the full amount of the debt (not just the compromised sum) to be payable upon the Applicant’s default in making the agreed settlement payments.
 

Agreement that settlement is not to remain in place

A further scenario can apply where the settlement agreement is reached on the basis that the FSP and Applicant agree that the settlement will not remain in effect unless the Applicant performs its obligations under the settlement, usually the requirement to make specified repayments. In that situation, the failure to make the required settlement payments results in the settlement never being fully executed, rendering it ineffective. This means that the FSP and Applicant return to their original positions existing prior to the settlement being entered into and the FSP can enforce its original rights and the Applicant raise its initial defences.

Default Judgment

Where an Applicant fails to comply with terms of settlement then the FSP is entitled to obtain a court judgment for breach of the terms of settlement. However, it is not appropriate that terms of settlement provide that an Applicant consents to judgment. An Applicant should be permitted to contest that judgment on the basis that they did comply with the terms of settlement. To afford the Applicant this opportunity, the FSP should, as a general rule, give the Applicant at least seven days notice of any default in the terms of settlement.

Restoring Discontinued Legal Proceedings

Sometimes, disputes lodged at FOS have been the subject of legal proceedings which have been issued but not yet determined. FOS’s Terms of Reference require, in certain circumstances, that the FSP must not pursue those legal proceedings while the dispute is being considered by FOS.

In some cases where:

  1. previous legal proceedings have been discontinued: and
  2. the FOS dispute has been subsequently settled: but
  3. the Applicant has not complied with that settlement,

the FSP may seek to restore or reinstate those previous legal proceedings. This can occur provided such a right is reserved in the terms of settlement. FOS acknowledges that this is an acceptable approach as it saves in court costs which may ultimately be passed on to the Applicant if the proceedings were required to be reissued.

However, where this occurs it is important to ensure that the Applicant is advised of the default so as to allow the Applicant an opportunity to raise any defence it may have to that default.